Exchange and Trade

Introduction

The words "exchange" and "trade" refer to the same activity--people who have one thing and want a different thing can exchange or trade it voluntarily with each other. The word "exchange" tends to emphasize trades within a single country or locale. The world "trade" tends to emphasize international aspects. Regardless, the activity of exchanging or trading is the same, whether it is with your neighbor or someone living clear across the world.

Economists disagree about some things, but they universally agree that free trade--meaning the opportunity to engage in voluntary exchange or trade--is beneficial on all sides. To summarize this mutual benefit, economists often say "There are gains from trade." In the case of individuals, exchange obviously won't take place unless both parties benefit. See Comparative Advantage and the Benefits of Trade for a discussion of how free exchange benefits the participants. In the case of whole countries, no matter how large and complex the world or no matter how interconnected the worldwide economies--which is sometimes called "globalization" or "interdependence"--the underlying individuals who engage in trade all benefit. Despite the evident benefits, government restrictions on free trade are common. The arguments for and against restricting trade and exchange are discussed at Barriers to Trade.

"Buying local" has become a hot topic. Buying local evokes local or national pride. Buying from local producers saves on transactions costs, such as the costs of transportation. However, it can also result in the tradeoffs of paying higher prices or limiting the opportunities available to local citizens. You can learn more about the arguments for and against buying local at Globalization, Interdependence, and Local Trade.

This page focuses on the basic meanings of exchange and trade.

Definitions and Basics

Barter, by William Stanley Jevons. Chapter I in Money and the Mechanism of Exchange. On Econlib.

Some years since, Mademoiselle Zelie, a singer of the Theatre Lyrique at Paris, made a professional tour round the world, and gave a concert in the Society Islands. In exchange for an air from Norma and a few other songs, she was to receive a third part of the receipts. When counted, her share was found to consist of three pigs, twenty-three turkeys, forty-four chickens, five thousand cocoa-nuts, besides considerable quantities of bananas, lemons, and oranges. At the Halle in Paris, as the prima donna remarks in her lively letter, printed by M. Wolowski, this amount of live stock and vegetables might have brought four thousand francs, which would have been good remuneration for five songs. In the Society Islands, however, pieces of money were very scarce; and as Mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the mean time to feed the pigs and poultry with the fruit....

Exchange, by William Stanley Jevons. Chapter II in Money and the Mechanism of Exchange. On Econlib.

Money is the measure and standard of value and the medium of exchange, yet it is not necessary that I should enter upon more than a very brief discussion concerning the nature of value, and the advantage of exchange. Every one must allow that the exchange of commodities depends upon the obvious principle that each of our wants taken separately requires a limited quantity of some article to produce satisfaction. Hence as each want becomes fully satiated, our desire, as Senior so well remarked, is for variety, that is, for the satisfaction of some other want. The man who is supplied daily with three pounds of bread, will not desire more bread; but he will have a strong inclination for beef, and tea, and alcohol. If he happen to meet with a person who has plenty of beef but no bread, each will give that which is less desired for that which is more desired. Exchange has been called the barter of the superfluous for the necessary, and this definition will be correct if we state it as the barter of the comparatively superfluous for the comparatively necessary....

Trade is simply the trading of something for something else. This can be one good for another good, one good for money, one good for a service, a service for a good, money for a service, etc. You get the idea. Trade is an exchange of things.

Usually, people or civilizations trade things that they have too much of for things that they don't have enough of....

Free Market, by Murray N. Rothbard, from the Concise Encyclopedia of Economics

Free market is a summary term for an array of exchanges that take place in society. Each exchange is undertaken as a voluntary agreement between two people or between groups of people represented by agents. These two individuals (or agents) exchange two economic goods, either tangible commodities or nontangible services. Thus, when I buy a newspaper from a newsdealer for fifty cents, the newsdealer and I exchange two commodities: I give up fifty cents, and the newsdealer gives up the newspaper. Or if I work for a corporation, I exchange my labor services, in a mutually agreed way, for a monetary salary; here the corporation is represented by a manager (an agent) with the authority to hire....

Free Trade, by Alan S. Blinder, from the Concise Encyclopedia of Economics

For more than two centuries economists have steadfastly promoted free trade among nations as the best trade policy. Despite this intellectual barrage, many "practical" men and women continue to view the case for free trade skeptically, as an abstract argument made by ivory tower economists with, at most, one foot on terra firma. These practical people "know" that our vital industries must be protected from foreign competition.

The divergence between economists' beliefs and those of (even well-educated) men and women on the street seems to arise in making the leap from individuals to nations. In running our personal affairs, virtually all of us exploit the advantages of free trade and comparative advantage without thinking twice....

One evening, when John returned from his work, he found his daughter Patty showing off a new silk gown to her mother. It was a present which her lover had just given her, for the approaching wedding day. Patty's eyes, which had seldom beheld any thing so beautiful, shone with delight, as her mother admired it; and her father gave her a hearty kiss, and said she would be as smart a bride as had ever been married in the village. "Ay, and it is a French silk, too, mother," exclaimed Patty.--"Why, as for that," replied her mother, "I don't see the more merit in its being French; and I did not think, Patty, you were such a silly girl as to have all that nonsense in your head. No, indeed, it is bad enough for the great lady-folks to make such a fuss about French finery, so that they can't wear a bit of honest English riband. I don't like your gown a bit the better for being French. No; and I should have thought that your husband, that is to be, might have given you an English silk instead."...

Transportation costs and the costs of middlemen: Spatial Economics, from the Concise Encyclopedia of Economics

Producers and buyers are dispersed in space, and overcoming the distances between them can be costly. Much commercial activity is concerned with "space bridging," and much entrepreneurship is aimed at making good use of locational opportunities and cutting the costs of transport and communication. Spatial economics is the study of how space (distance) affects economic behavior....

Interdependence and the division of labor: I, Pencil, by Leonard Read.

Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn't it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year....

In the News and Examples

Nobel Laureate Vernon Smith of Chapman University and George Mason University talks with EconTalk host Russ Roberts about the ideas in his new book, Rationality in Economics: Constructivist and Ecological Forms. They discuss the social and human sides of exchange, the robust nature of equilibrium in experiments and the real world, the seeming contradiction between Adam Smith's two great works, the unpredictability of how innovation emerges and its rationality, what neuroscience might tell us about economic decision-making, and the challenges of small-group intimate exchange and our interactions with strangers in the extended order of the marketplace.

Timothy Brook, professor of history at the University of British Columbia and author of Vermeer's Hat: The Seventeenth Century and the Dawn of the Global World, talks with EconTalk host Russ Roberts about the expansion of global trade between Europe and the rest of the world, and in particular, North American and China. He discusses the differences and similarities between Chinese and Western attitudes toward trade and exploration and the implications for innovation and knowledge.

In an interview, philosopher David Schmidtz discusses the social conditions necessary for alleviating poverty. Opportunities to trade and to better one's life, through voluntary relationships in a world of peace, lead to mutually beneficial outcomes for everyone.

Don Boudreaux, of George Mason University, talks about the ideas in his book, Globalization. He discusses comparative advantage, the winners and losers from trade, trade deficits, and inequality with EconTalk host Russ Roberts.

None of their forays in global economics can compare in vehemence and media impact with the utterances of Diego Armando Maradona, the famous ex-soccer player now turned into a TV talk-show celebrity as an unflagging foe of globalization....

While virtually all economists think free trade is desirable, they differ on how best to make the transition from tariffs and quotas to free trade. The three basic approaches to trade reform are unilateral, multilateral, and bilateral....

Mike Munger, frequent guest and longtime Econlib contributor, speaks with EconTalk host Russ Roberts about fair trade coffee and free trade agreements. Does the premium for fair trade coffee end up in the hands of the grower? What economic forces might stop that from happening? They discuss the business strategy of using higher wages as a marketing strategy to attract concerned consumers. They turn to the issue of free trade agreements. If the ideal situation is open borders to foreign products, is it still worthwhile to negotiate bilateral and multilateral agreements that requires delays, exemptions and a bureaucracy to enforce? What is the cost of including environmental and various labor market regulations in these agreements?

Mike Munger of Duke University talks with EconTalk host Russ Roberts about the often-vilified middleman--someone who buys cheap, sells dear and does nothing to improve the product. Munger explains the economic function of arbitrage using a classic article about how prices emerged in a POW camp during World War II. Munger then applies the analysis to the financial crisis.

Is outsourcing good for America? How does foreign competition affect wages in the United States? Ed Leamer, professor of economics at UCLA, talks about the effects of outsourcing on wages, jobs, and the U.S. standard of living. Drawing on a review of Thomas Friedman's The World is Flat, Leamer talks with host Russ Roberts about technology, trade, productivity and inequality.

A Little History: Primary Sources and References

William Bernstein talks with EconTalk host Russ Roberts about the history of trade. Drawing on the insights from his recent book, A Splendid Exchange: How Trade Shaped the World, Bernstein talks about the magic of spices, how trade in sugar explain why Jews ended up in Manhattan, the real political economy of the Boston Tea Party and the demise of the Corn Laws in England. The discussion closes with the political economy of trade today and the interaction between trade and income inequality.

John Nye of George Mason University talks with EconTalk host Russ Roberts about his book, War, Wine, and Taxes. The conversation covers the history of Britain and France's trade policy, why the British drink beer and why Ricardo's example of Britain trading wool for Portuguese wine is bizarre. Nye turns the traditional story on its head--he argues that France was more of a free trader than Britain and that the repeal of the Corn Laws was not the dividing line between Britain's protectionist past and free trade future. At the end of the discussion, Nye emphasizes the importance of domestic free trade for economic growth.

Of the Division of Labor, by Adam Smith. Book I, Chapter 1 from the An Inquiry into the Nature and Causes of the Wealth of Nations

Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.... [par. I.I.3]

To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful. It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor. The farmer attempts to make neither the one nor the other, but employs those different artificers.... [par. IV.2.11]

Advanced Resources

Stephen Marglin of Harvard University and author of The Dismal Science: How Thinking Like an Economist Undermines Community talks with EconTalk host Russ Roberts about the markets and community. Marglin argues that markets and commercial transactions undermine the connections between us. He wants people to pay more attention to what is lost and not just what is gained by the pursuit of material well-being. Topics discussed include the nature of community, the role that voluntary associations play in our lives, the costs and benefits of mobility, the role of insurance in reducing our dependence on each other, and the nature of knowledge.

The cuneiform inscription in the Liberty Fund logo is the earliest-known written appearance of the word "freedom" (amagi), or "liberty." It is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash.